An assured way to anchor clients

The distribution of insurance products through banks, quaintly known as “bancassurance”, represents one of the fastest growing activities in the Asian wealth management sector.

Within the risk-return spectrum, insurance-linked products can be appealing to clients, as they are positioned between cash and bank deposits at one end and mutual funds at the other.

While banks are notorious for churning products, insurance-linked products, on the other hand, are generally held for the long-term by wealthy clients tied into a plan.

The main challenge insurers face when selling investment-linked products through banks is training staff, as advisers need to understand both protection and investments. However, it could be argued unit-linked products, among other insurance products, are perhaps easiest to sell through bank channels because they are similar to mutual funds, with an open architecture approach familiar to many bank customers.

It is for these insurance companies to balance demands for customer choice against the need to contain administration costs once product ranges begin to mushroom.

Leading banks in the region such as HSBC and DBS increasingly see investment-linked products as “anchor relationships” with the customers, because they represent long-term investments. In Singapore, DBS sets minimum sales thresholds – linked to target earnings – for both mutual funds and insurance products, to make sure advisers are impartial and explain the merits of both products to clients.

Lessons from history

It is debatable whether such internal measures can always align customers’ interests with those of a wealth manager. History shows us that commission-based incentives always lead advisers to push products.

In the 1990s, huge competition among British and American insurance companies to sell investment-linked products in Hong Kong and the Middle East, based on extortionate commissions, calculated through dubious industry-wide formulae, led to lasting headaches for clients and regional regulators.

But the banks say rules have been tightened up, with strict criteria in Singapore, detailing fact finding requirements which make sure product recommendations are appropriate. The banks also highlight a heavy portion of advisers’ compensation is now represented by their basic salary.

Insurance companies active in Asia are clearly being targeted, for their distribution and product creation power, by investment banks such as Société Générale.

Whereas in the US insurance products have become a haven for a small number of ultra high net worth clients looking to minimise taxes, there is a more democratic Asian distribution model emerging, which will serve the investment needs of a much greater number of customers.

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